16 Lessons from Warren Buffett for COVID-19 Investors
Warren Buffett famously advised, “Be fearful when others are greedy, and greedy when others are fearful.” Following March 12, 2020, the DOW’s worst day since 1987, the predominant investment disposition has swung from greed to fear — prompting some to pause and reflect.
Some potential investors are foaming at the mouth at 2008-reminiscent stock prices; Others are waiting for a strategic time to liquidate; Newbies are attempting to approach investment thoughtfully, not impulsively; And more still are stuck at home with their own thoughts. No matter which group you fall into, there is a lot we have to learn from Warren Buffett’s 50-year tenure at Berkshire Hathaway, chronicled through his witty, insightful, and timeless Annual Letters to the Shareholders.
Do not take the words of a random person on the internet (me) as investment advice. The following was written for educational purposes.
1. “We [Buffett and Munger] want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.”
As expressed in the 1977 Berkshire Hathaway Letters to Shareholders, Chairman Warren Buffett and former Vice Chairman Charlie Munger’s approach to acquisitions and securities was largely the same: understand the company, the industry, the team, and the price.
Not only will this approach catalyze more informed decisions, but it will drastically reduce emotion-based ones. It is impossible to impulse-buy stock if you conduct thorough research. Similarly, it is difficult (though not impossible) to impulse-sell if you have done your research, believe in the company’s team and mission, and have invested accordingly.
2. “We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term.”
The quote continues, “In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”
A stock’s diminishing price due to market conditions should be irrelevant to the company’s value if you are interested in long-term gains. Penned in 1977, this quote is at odds with today’s investment zeitgeist: Day trading became popular in 1975 thanks to de-regulation, and in the 1990s, it became digital, thus even more accessible.
When comparing short term and long term investment strategies, Mark Twain comes to mind: “Whenever you find yourself on the side of the majority, it’s time to pause and reflect.”
3. “We will reject interesting opportunities rather than over-leverage our balance sheet.”
Close to 500 million people are restricted in some way in China. Italy, a country of 60 million people, has also been in lockdown since March 9, 2020. Other countries, such as the U.S., will most likely follow. Not only is the world, highlighted by these regions, overcome with healthcare uncertainty, but global economic uncertainty is close behind.
In his 1983 Letter to Shareholders, Warren Buffett describes his conservative approach to investment: Though it may hurt profits, especially short term, it leaves a comfortable margin for error. In uncertain times, it may be wise to do the same with personal finance.
4. “The projections will be dazzling — the advocates will be sincere — but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.”
The people behind a product or company matter — a lot, but the industry matters, too. This is a mistake that many venture capitalists have made in recent times.
Investment in companies that have branded as unicorn startups but eventually struggle to distinguish themselves from the competition fail to give investors their expected (though astronomical) returns. WeWork is a classic example.
5. “One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it.”
Conventional wisdom is that a product must be 10x better or 10x cheaper to merit investment. In my opinion, 10x better cannot rely on marketing dollars. Ex: My pen is better than your pen because I have more money for Instagram ads. My pen must actually be 10x better.
This rationale still holds true when investing in stocks. Even if you cannot fathom competing with X company, is there someone else in the marketplace who could or does? Is the company whose stock you are considering 10x better than their competitor— or able to provide those services 10x cheaper?
6. “Why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off?”
Preceded by the notion, “We never take the one year figure very seriously,” Warren Buffett calls into question the quantification of annual gains. Just because a stock has not increased significantly in value over 365 days does not mean that the company behind it — the underlying principles that should have governed why you purchased the stock— have changed.
7. “Red lights should start flashing if the five-year average annual gain falls much below the return on equity earned over the period by American industry in aggregate.”
In other words, a company worthy of investment should be outpacing industry growth, plain and simple.
Warren Buffett continues, in advice to his own stockholders, “Watch out for our explanation if that occurs as Goethe observed, ‘When ideas fail, words come in very handy.’” Again, hearkening back to WeWork, do not mistake favorable market conditions or marketing for value.
8. “The ‘downs’ can be helpful in that they give us an opportunity to expand a position on favorable terms.”
Though stock market troubles will decrease the value of a current position, they offer the chance to double-down on it and reduce your acquisition price. Again, it is good to have thoughtfully considered one’s investments before a bear market makes you question them.
9. “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
There is a reason why Warren Buffett is known as a billionaire and thinker rather than for his specific investments: Most of them are boring at surface value.
In the same passage, Buffett writes, “Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.”
Beware of industries or companies with oversized sex appeal. At best, everyone already knows about these “opportunities” and at worst, there is less to them than meets the eye.
This is especially relevant for new-age social media-driven companies. Cheap Facebook and Instagram ads buoyed many “startups” to success. As those ads have increased in price, these capital-intensive companies look less and less like unicorns.
See the article, “Why All the Warby Parker Clones Are Now Imploding,” to learn more.
10. “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
This quotation needs no explanation. Sleep, health, and financial security are underrated, as everyone suddenly remembers when the financial markets go south.
11. “Beware of geeks bearing formulas.”
The same passage explains, “Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols.”
As anyone who has participated in the startup ecosystem (as an investor or founder) can tell you, projections can be loose — very loose. As a good friend of mine advised, “Your projections will be wrong, it’s just a question of degree.”
12. “When investing, pessimism is your friend, euphoria the enemy.”
Panic selling is a bad idea, as any long-term Bitcoin (BTC) investor will tell you. But, interestingly, Warren Buffett extends beyond negative emotions: Getting pleasure through investment is a quick way to feel let down.
13. “The market outperformed business for a very long period, and that phenomenon had to end.”
Written in 2001, this could have been written in 1929, 2008 or 2020. Though there is no doubt that today’s bear market is the result of the COVID-19 epidemic, there was widespread concern that we were headed for one, anyway.
In fact, Buffett wrote this following the 9/11 attacks. In other words, disaster may stimulate economic uncertainty that was already on the horizon.
Today, Buffett’s questioning remains just as relevant: Do not assume that the strength of the DOW encapsulates the strength of the American economy, at a high or low. There are many forces at work behind a stock, only one of which is the company whose value it is supposed to represent.
14. “People who buy for non-value reasons are likely to sell for non-value reasons.”
As a prospective buyer, it is useful to consider a stock from the seller’s perspective. What kind of investor is a company trying to attract, if any? More importantly, are they focused on the business itself or the stock value?
In response to the question of why Berkshire Hathaway was not splitting its stock (in 1983), Warren Buffet answers in great detail: “Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers.”
16. “In discussing how managers with bright, but adrenalin-soaked minds scramble after foolish acquisitions, I quoted Pascal: ‘It has struck me that all the misfortunes of men spring from the single cause that they are unable to stay quietly in one room.’”
A growing number of people worldwide are being forced to do just that: Sit in a quiet room. As depicted in memes found across the internet, this is almost impossible to do. Do not let boredom dictate your financial future.
Warren Buffett’s Timeless Advice for Periods of Prosperity and Uncertainty
One of the benefits of change — whether it’s the stock market or the weather — is its ability to foster new attitudes and frames of mind. Though the current state of the COVID-19 pandemic is nothing to joke about or relish, its economic impacts may open the doors for deals not available during a bull market. Just as “euphoria” can cloud one’s judgment during prosperous times, so can fear during a crisis.
